By Lisa Twaronite
TOKYO (Reuters) - Investors braced for a rocky session in Asia on Tuesday, with equities and the dollar under pressure after disappointing U.S. manufacturing data cast a pall over Wall Street.
MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was down about 0.5 percent in early trade and the greenback slipped 0.3 percent (.DXY) against a basket of currencies to 81.065.
Data showing manufacturing activity slowed sharply last month dealt a heavy blow to markets already nervous the U.S. Federal Reserve's decision to taper its asset purchases would lead to a capital flight out of emerging markets.
January's sharp fall in output activity came on the back of the biggest drop in new orders in 33 years, while construction spending barely rose in December, suggesting the U.S. economic recovery is more tenuous than some investors had believed.
"In the past, there have been times when the dollar benefited from a flight to quality but the source of the market's concerns today stems from the U.S. and for this reason, the greenback sold off as stocks tumbled," Kathy Lien, managing director at BK Asset Management, said in a note to clients.
The benchmark S&P 500 index recorded its worst single-day drop in seven months, while the CBOE volatility index soared 16.5 percent to close at its highest level since December 2012.
That sent the dollar as low as 100.77 yen and the euro as low as 136.37 yen, levels neither pair had touched since late November.
In early Asian trading, the dollar took back some lost ground to buy 101.09 yen and the euro was nearly flat on the day at 136.68 yen.
The Australian dollar was slightly higher at $0.8752, as investors awaited the Reserve Bank of Australia's policy decision due at 0330 GMT.
All analysts polled by Reuters expected the RBA to keep its 2.5 percent cash rate intact, although some said the central bank might drop its easing bias.
(Editing by Richard Pullin)